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The run-up to this year’s Budget has had more twists and turns than a snake with an itch, with key announcements leaked just before Chancellor Rachel Reeves stood up to speak.
The Office for Budget Responsibility accidentally released its report outlining the main Budget measures ahead of her speech. These included a freeze in income tax thresholds, a cap on salary sacrifice pension contributions, and a new tax on homes worth more than £2m.
Here, we break down all the key announcements designed to tackle the public finance deficit and what they mean for your pocket.
Pensions
Salary sacrifice pension contributions capped
Salary sacrifice pension contributions above £2,000 will face National Insurance from April 2029.
Salary sacrifice is a vital and valuable feature of many workplace pension schemes. If your employer offers a salary sacrifice pension scheme, you can agree to give up a portion of your salary. Instead of paying that money to you as income, your employer pays it straight into your pension as an employer contribution.
Because the money goes directly into your pension before tax and National Insurance are deducted, you’ll only pay these on your reduced salary, not the full amount. This means you could end up with a higher take-home pay than if you made standard pension contributions from your salary, and a larger total pension contribution, depending on whether your employer passes on their own NIC savings.
Malli Kini, a partner at Blick Rothenberg, said, “Scrapping salary sacrifice for pensions dismantles one of the UK’s most effective and widely used saving mechanisms. Over 7 million employees rely on it to boost pension contributions and reduce National Insurance, while employers depend on it to manage payroll costs efficiently.”
“Crucially, salary sacrifice is also one of the only practical and legitimate planning tools available to taxpayers trapped in the £100,000 tax cliff edge, where the withdrawal of the personal allowance creates an effective 60% marginal tax rate between £100,000 and £125,140.
“Removing it would trap thousands of senior professionals, including NHS consultants, senior public sector staff, finance professionals and business owners. They will be in punitive tax territory with no realistic route out other than asking for lower pay.”
Despite the changes, experts urge people not to make any knee-jerk reactions, which could reduce their overall pension savings.
Andrew Marker, head of retail pensions at Vanguard Europe, said: “Based on the current guidance, despite these changes, most investors will be best off sticking to their existing plans. The exact impact will depend on your personal circumstances, however taking hasty action could leave you thousands of pounds worse off in retirement.
“For example, someone who earns £48,000, who sacrifices £5,000 of their salary, will have £3,040 less in their pension over 30 years, as a result of additional national insurance contributions. However, had they reduced the amount they sacrificed to the new £2,000 cap, their pension pot would be £23,459 less.
“The impact will be greater for those on higher earnings. Someone earning £75,000 would have £5,800 less in their pension over 30 years if they made no change to their salary sacrifice, but £67,450 less if they decided to cut their contributions all the way down to the £2,000 limit.
“Pensions remain one of the best ways for most people to save for retirement, given the tax relief on contributions, tax-free growth and tax-free cash lump sums.”
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More positively, pension tax relief and tax-free cash escaped reform in this year’s Budget, despite plenty of speculation that they might be targeted.
State Pension
The Chancellor confirmed prior to the Budget that the State Pension will increase by 4.8% in the 2026/27 tax year, in line with the government’s triple lock guarantee. This links the annual rise in the State Pension either to earnings numbers for May-July, September’s Consumer Prices Index (CPI) measure of inflation, or a minimum 2.5%, whichever is the highest. The earnings growth figure was announced as 4.8%, putting it well above 2.5% and CPI inflation in September at 3.5%, which is why the State Pension will increase by this amount. Find out more about the pension triple lock and how it works.
This means that the new full State Pension will rise from £230.25 a week in the current 2025/26 tax year to £241.30 next April, representing an annual increase of an extra £575 a year, although the amount you’ll personally receive will be based on your National Insurance Contribution record.
The full basic State Pension is currently £176.45 a week, and this will rise to £184.90 at the start of the new tax year on April 6, adding around £440 to annual payments. Learn more in our article What will the State Pension be in 2026?
James Norton, head of retirement and investments at Vanguard Europe, said: “The state pension is key to most people’s retirement plans. The fact that it’s increasing is good news for retirees, because more of their basic expenditure will be covered with this guaranteed income.
“However, this also means the new state pension will now take up almost 100% of pensioners’ annual personal tax allowance. If you have other sources of income in retirement, a considered approach will be needed to ensure you’re being tax efficient.”
Tax and National Insurance
Income tax thresholds frozen until 2030
The Chancellor has frozen income tax thresholds for another two years until 2030, meaning that most people will end up paying more tax due to what’s known as ‘fiscal drag’.
This effectively means that any pay rise will push you ever closer to crossing a tax threshold. As a result, some people’s incomes will exceed the personal allowance, forcing them to pay income tax and National Insurance for the first time, while others will find themselves paying higher or additional rate tax.
The current income tax thresholds are £12,570 (basic rate), £50,270 (higher rate), and £125,140 (additional rate).
Jason Hollands, managing director at wealth management firm Evelyn Partners, said: “While the Chancellor can try to argue otherwise, this is very much an increase in income tax on working people across all income levels, as millions more will be drawn into paying income tax at both the basic rate and the higher bands.
“But as people won’t see an immediate change in their take-home pay and the tax burden just builds over time, it is the very definition of a stealth tax. Higher rate tax, once the preserve of the wealthy, is going to be the default rate of middle-income salaried roles, most of whom don’t feel comfortably off, never mind affluent.”
The two-year extension to the freeze in these thresholds means that high earners could pay over £4,000 more tax a year without any real boost to their purchasing power. Analysis by Rathbones found that someone earning £100,000 by April 2030 would face an extra tax burden of £4,043, compared with £2,517 if the freeze ends in April 2028.
Oliver Jones, Head of Asset Allocation at Rathbones, said: “This move increases the pain for those with little disposable income, as more people are dragged into higher tax bands – even though their real purchasing power hasn’t improved.
“People will feel the impact of these tax rises straight away. A bigger slice of any pay rise is lost to tax, which could discourage promotions or overtime.”
The additional tax burden would be £1,766 for someone who was on £80,000, £1,438 for those who earned £50,000, and £353 for those earning £35,000.
Dividend tax and Capital Gains Tax
The rate of dividend tax for basic and higher rate taxpayers will rise by 2 percentage points next April.
The change means it will rise from 8.75% to 10.75% for basic rate taxpayers, and 33.75% to 35.75% for higher rate taxpayers. To work out your dividend tax rate, you need to add dividends to your other income to work out the income band you’re in. You may pay dividend tax at more than one rate if it pushes you over a tax threshold.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “Income investors have already been hit with a succession of horrible cuts in the annual dividend allowance. It fell from £5,000 to £2,000 back in April 2018, then it was slashed to £1,000 in April 2023 and just £500 in April 2024. To make matters worse, the dividend tax rate was hiked in April 2022 too – up 1.25 percentage points for every tax bracket.
“This tax attack on dividends flies in the face of the government’s desire to encourage investors to hold UK equities. Given that the London market is home to so many good income stocks, it means particularly harsh tax treatment if they hold any of these investments outside an ISA or SIPP. It risks persuading investors to take their money elsewhere, or putting them off investments entirely.”
Capital gains tax relief on business sales made to employee ownership trusts will be reduced to 50% from 100%. No other changes to CGT rates or allowances were announced.
National Insurance
Inheritance tax receipts for April 2025 to October 2025 reached £5.2 billion according to latest HMRC data, £0.2 billion higher than the same period last year. No changes to Inheritance Tax were announced by the Chancellor, although last year’s Budget decision to make pensions part of people’s estates for inheritance tax purposes from 2027 has the potential to make many more people liable for the tax.
The current £325,000 Inheritance tax threshold remains frozen for another two years, to 2030.
If you’re concerned about inheritance tax, you may want to consider making the most of current gifting allowances, which haven’t been altered. For example, you can give away £3,000 worth of gifts each tax year without them being added to the value of your estate. If you don’t use this annual exemption one year, you can carry it forward to the next tax year.
As well as your £3,000 annual exemption, you can give as many £250 gifts per person as you want during the tax year, provided you haven’t used another exemption on the same person. Learn more in our article Six ways to reduce inheritance tax bills.
Savings
Cash ISA allowance cut to £12,000
The Chancellor announced that the cash ISA annual allowance will be cut to £12,000 with effect from April 2027, although savers aged 65 and over will retain their £20,000 allowance.
The aim of this reduction is that it will persuade more savers to invest more of their allowance in stocks and shares and other assets, which might hopefully provide them with higher returns over the long term.
According to HMRC, almost 10 million people paid into a cash ISA in 2023/24 – which was up 26% in a year. Nearly £29 billion was paid into cash ISAs between April and September this year, separate Bank of England data shows.
Rachael Griffin, personal tax expert at Quilter, said: “This change is unlikely to trigger a rush into stocks and shares ISAs. Instead, we may see money diverted into Premium Bonds or other perceived safe havens.
“The carve-out for over-65s adds another layer of complexity. It appears designed to protect older savers who rely on cash, while pushing younger people toward investing. But ISAs were meant to be simple and flexible. Splitting allowances between cash and investments, with age-based exceptions, undermines that simplicity.”
Help to Save made permanent
The Help to Save savings scheme, which is designed to help people on low incomes to start saving and was originally due to end in 2027, will be made permanent and opened up to parents and carers on Universal Credit from 2028.
Once opened, the Help to Save account lasts for four years, over which time you can save anywhere between £1 and £50 each month, or a total of £2,400 over the term.
Rather than offering interest on your savings, a Help to Save account will give you bonuses after two and four years, paid straight into your bank account, which essentially amounts to an extra 50p for every £1 you save. That means if you pay in the maximum amount you could earn bonuses totalling £1,200.
The scheme, which is currently available to around 3m people on Universal Credit, will be expanded to an extra 1.5 million savers, including Universal Credit claimants who have children in education or carers who provide 35 hours of care a week to someone with a disability.
National Living Wage and Minimum Wage up
The National Living Wage will increase by 4.1% to £12.71 an hour from April next year, adding £900 a year to the pay packet of a full-time worker. Those aged 18-20 will see their National Minimum Wage increase by 85p an hour up to £10.85 an hour, and under-18s and apprentices will receive £8 an hour, an increase of 45p an hour. The National Minimum Wage is the minimum pay per hour that almost all workers are entitled to. The National Living Wage is higher than the National Minimum Wage, and workers get it if they’re 21 and over.
Although these changes are positive news for low-paid workers, there are fears that steeper costs for employers could result in them hiring fewer people or increasing prices for customers.
Mike Ambery, Retirement Savings Director at Standard Life, said: “The increase in the National Minimum and Living Wage rates will offer much-needed relief to low earners, many who are still struggling with persistently high living costs. For businesses, however, the above-inflation rise will likely add further pressure on those still managing the impact of last year’s Budget announcements, which raised the cost of employment.”
Tax on savings income to increase
The Budget speech announced a two percentage point rise in tax on savings interest from 2027, which will push the top rate of savings tax to 47%. The personal savings allowance will still protect the first £1,000 of savings interest for basic-rate taxpayers and £500 of interest for higher-rate taxpayers, but after that, people will face steeper tax bills. The change means that making the most of tax-efficient ISAs is more important than ever if you want to protect your savings from tax.
Mr Hollands of Bestinvest said: “For now, cash savers can still plough up to £20,000 into Cash ISAs in both the current and next tax year, sheltering a potential £40,000 of savings from the taxman ahead of the 2% increase in tax on savings being introduced.”
Benefits
End to two-child benefit cap
Parents can currently only claim tax credits or Universal Credit for the first two children they have. However, in a move that the Chancellor claims will lift 450,000 children out of poverty, the two cap limit will be removed in April next year.
The change will mean parents with three or more children will receive more in Universal and tax credits.
Winter Fuel Payments for pensioners on lower incomes
We knew prior to the Budget that the Winter Fuel Payment was to be reinstated for millions of pensioners, with those on incomes of £35,000 or less now eligible for the payment. This follows a government U-turn on its original plan that only those claiming means-tested benefits would qualify.
If you’re on a low income and struggling to cover your heating bills, it’s vital to check whether you might qualify for other financial support, such as Pension Credit. This could not only provide you with valuable retirement income, but also a range of other benefits, such as help with housing costs, council tax and NHS dental care. Learn more in our articles Pension Credit explained and Winter Fuel Payment 2025: who is eligible, and how can I claim?
The Chancellor announced in the Budget that a cut to green levies would result in a £150 reduction in average energy bills from next Spring.
Property and housing
No changes to Stamp Duty but new ‘mansion tax’ from 2028
Despite weeks of speculation that the Chancellor would reform Stamp Duty in the Budget, no changes we announced.
However, a new ‘mansion tax’ will be introduced in April 2028, applied through a council tax surcharge. Accountancy firm Blick Rothenberg said such a move would prove “disproportionally painful” for pensioners who have lived in their property for many years and are asset-rich but income-poor.
So how will it work? From April 2028, anyone owning a property assessed by the Valuation Office as being worth more than £2m (in 2026 prices) will pay an annual charge on top of their existing council tax bill.
The surcharge will be split into four value bands, starting at £2,500 a year for homes in the £2 million to £2.5 million band and rising to £7,500 for properties valued at £5 million or more. All charges will be uprated annually in line with CPI inflation. The measure is expected to raise around £0.4 billion for the government in 2029/30.
However, David Little, Partner in financial planning at wealth management firm Evelyn Partners, said: “With the measure not expected to come in until 2028, there is plenty of time for the law of unintended consequences to take effect.
“There could be widespread implications for the property market in the South East of England, where transactions could surge before the surcharge kicks in and sellers try to price properties below the threshold.
‘The cynic could argue that it is really just a sop to those Labour backbenchers and trade unionists who had been calling for a wealth tax. As with a broader wealth tax though, property taxes are fraught with difficulties, not least around the valuation of assets. There will no doubt be a host of objections from property owners, not just around the £2m mark but across those three bands.”
Higher income tax on rents
Income tax on rents will see a 2 percentage point increase, taking the basic rate band from 20% to 22% and higher rate bands from 40 to 42%, and 45% to 47%.
Heather Powell, Property and Construction Lead at Blick Rotherberg, described the changes as “likely to be the very final straw for many landlords who own their buy-to-let properties.”
She said: “It’s potentially good news for first-time buyers, but a major issue for those who rent their home. The mobility of the UK workforce is likely to be significantly impacted, impacting on productivity for the UK”.
Transport
Rail fares frozen
Rail fares will be frozen for the first time in 30 years, the government announced prior to the Budget. However, this only applies to regulated fares and only in England. Despite the freeze, rail fares remain really expensive, although there may be various discounts and railcards available to help reduce the cost of tickets if you’re in your 50s, 60s and beyond. Read more about these in our guide Railcards for over 50s and 60s: how to save money on UK train travel.
Bus fare cap to remain
England’s £3 bus fare cap for single bus journeys outside London will be extended through to March 2027, Rachel Reeves confirmed prior to the Budget. It was previously only capped at this level until the end of this year.
Fuel duty frozen again - but EV drivers to face pay-per-mile tax
The Chancellor maintained the 5p freeze in fuel duty for the fifth consecutive year, saving drivers more than £3 a tank. However, from September 2026, the freeze will be reversed “through a staggered approach”. From April 2027, fuel duty rates will be increased annually by the RPI measure of inflation.
The Chancellor also announced that a ‘Fuel Finder’ would be introduced in early 2026. This will see all petrol stations reporting their prices so that customers can find the cheapest fuel where they live.
Drivers of electric and hybrid cars will be taxed for using the road from 2028, and will be charged per mile, on top of other road taxes.
Alcohol and tobacco
No changes to the alcohol duty rises announced in last year’s statement were announced in this year’s Budget, meaning that increases in the duty will continue to be linked to the Retail Prices Index in September, which this year was 4.5%.
The price of a packet of cigarettes and other tobacco products will increase by RPI (retail price inflation) plus an extra 2% with effect from November 26.
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